Tag Archives: Austerity

Portuguese Labour Market Reforms in the Aftermath of the Eurozone Crisis: The Problems Behind the Recovery

This is a extended repost of a blog written with Jasper Simons for Critcom, the blog of the Council of European Studies.

If one were to believe the assessments of European institutions, Portugal is on the path to recover from the severe economic crisis it suffered from 2010 onwards, and the drastic reforms implemented in employment protection, unemployment benefits and collective bargaining are starting to yield results. Portugal swiftly implemented most of the measures contained in the Memorandum of Understanding (MoU) agreed with the Troika. Since then, exports have gone up, debt accumulation slowed down and unemployment decreased as well.

However labour market restructuring came with a high price tag, and the apparently promising numbers hide somewhat less encouraging developments for the long-term recovery of the country. The imposed changes to its political economy have not only led to a considerable deterioration of social protection, but they also coincided with high levels of emigration. The labour force has shrunk, and an impending demographic problem will be very difficult to reverse.

Portugal’s pre-crisis performance within the euro area, in contrast to Greece and Spain, was rather sluggish. In the aftermath of the financial crisis, José Sócrates’ socialist government (2005-June 2011) responded with a stimulus programme to push consumption and increase investment in the real economy. Active labour market and welfare policies improving access and levels of unemployment benefits were adopted in order to maintain demand and contain rising poverty. The coverage of unemployment insurance (the share of unemployed people actually receiving benefits) had steadily improved since 2000 (Figure 1

Figure1.pngSource: Pordata

With Portugal’s fiscal position worsening, the government quickly turned to spending cuts and deregulation reforms geared towards reassuring markets. These programmes could not prevent bankruptcy, however, and Portugal was forced to request a 79 billion euro bailout with even more severe austerity and flexibilisation policies attached. The MoU included, inter alia, the revision of the labour code and severe reductions in severance and overtime payments, measures increasing the scope for the individualisation of contracts and dismissals and lowering and restricting access to unemployment benefits, which the centre-right Passos Coelho government (June 2011-November 2015) implemented.

Firstly, employment protection and severance payments (of fixed-term contract workers) have been severely affected. Although Portugal still has relatively high protection levels in the European context (and had one of the highest levels in the run-up to the crisis), no other European country has witnessed such a strong liberalisation trajectory since the crisis (see Figure 2). Alongside the flexibilisation of dismissals, minimum severance payment requirements for employers were lowered. For instance, severance pay in case of a redundancy dismissal for a worker with five years of tenure dropped from 21.7 to 14.3 weeks between 2010 and 2013. The minimum wage was frozen at 485 euros/month from 2011 onwards (565 with Christmas bonuses), until the new left-wing coalition that came to power in 2016 increased it again.

Figure 2.jpegSource: OECD

Secondly, unemployment benefits were cut and eligibility requirements tightened reducing overall benefit. If unemployment did not decrease until recently, the share of people receiving benefits did decrease right when the government needed to cut expenditure. Coverage for both social and the ordinary unemployment benefits decreased: if high unemployment levels in Southern Europe often make the headlines, it is seldom mentioned that the actual number of unemployed people who receive benefits is much lower, and Southern Europe has had a rather poor record in this respect. Interestingly, if unemployment levels have decreased, this may have as much to do with the shrinking of the labour force as with the creation of jobs: between 2008 and 2014, the labour force (people in employment or seeking work) has shrunk by 303.000 people. If the number of jobs remains stable but the labor force decreases, unemployment goes down. This partly results from discouragement of workers, but also to a large extent from emigration. In fact, emigration may have had a greater impact because, as the government admitted, the number might be twice as high as official figures display. The Portuguese population has been shrinking since the crisis, and emigration added to an impending demographic problem, with the lowest fertility rates in the EU (1.23 children per woman) (Figure 3).

Figure3.png

Source: Pordata

Thirdly, collective bargaining has been decentralised in favour of firm level and individual agreements. Reforms of, erga omnes, extension have led to sweepingly decreasing coverage levels for ordinary workers (see figure 6). Remarkably, both the socialist and centre-right governments largely implemented these policies with the support, albeit lukewarm, of the social partners. Although the larger communist CGTP-IN remained absent, the socialist UGT worked together with employer organisations and both governments on many of the reforms including most of the MoU. This came, however, at the cost of internal division, loss of membership and various general strikes of both the CGTP-IN and the UGT.       Figure4.png            Source: UGT

Alexandre Afonso is an Assistant Professor at the University of Leiden, Netherlands. Jasper Simons is a political economy graduate and former European Economic and Social Committee trainee.

 

 

How did David Cameron manage to win the 2015 elections in spite of austerity?

The poor hit by austerity don’t vote, while the rich who benefit do

How can we explain the Conservative victory in last week’s British elections in the context of the austerity measures the Tories have been pushing through since they came to office? Indeed, even if the deficit hasn’t come down near the levels announced by the Coalition, there have been net cuts in social spending since it came to power. Political economy theories usually argue that voters sanction governmnets who cut social benefits. Building on the good ratings for economic competence attributed to the Tories in opinion polls, “austerians” have been trumpeting that this is a vindication of the austerity agenda. The storyline is that austerity works for everyone, unemployment is down, and this is why the Conservative party has triumphed in the polls. However, there is clear evidence that not everybody has been better off under the Coalition austerity plans. These plans have had distinct distributional effects: the poorest households have been hit the hardest, while middle-and higher income households have come out relatively unscathed.

This victory is interesting because the common wisdom until recently was that politicians would systematically avoid cuts in public spending that would challenge their electoral prospects. This is especially important for welfare programs since the path-breaking analysis of Paul Pierson: people like social programs they are entitled to, and getting rid of them loses votes for incumbents. However, cuts in public spending didn’t hamper the electoral score of the Tories here, and I think this is due to the setup of the British welfare state and the composition of the Tory electorate.

In a nutshell, low-incomes that paid the price for welfare cuts don’t vote, and especially don’t vote Tory, while those on higher incomes for whom lower taxes are more important do vote. After the poll debacle of the election, it appears that it wasn’t “Shy Tories” that were the decisive factor, but potential Labour supporters not bothering to vote. In the graph below, I have put together two measures: the share of net income coming from the state (from here; negative values mean transfers to the state as a share of net income), and the likelihood to vote in the general elections from the British Election Study by income quintile. The latter is not a very good measure because people systematically lie when they say whether they’re going to vote. However, it reports the difference to the average across quintiles on a scale from from 1 to 5. What the graph shows is that people who receive most of their income from the state via social transfers (and who are the most likely to be hit by austerity cuts) are also those that are the least likely to go and vote. By contrast, those who are net contributors to the public budget – and have an interest in cuts to get lower taxes – are those that are the most likely to vote. As I argued elsewhere, higher income quintiles are also much more likely to vote Tory. Hence, austerity could be pursued while limiting a potential backlash because it harms those that don’t vote, and rewards those who do.

image (66)Besides this structural tendency observed about everywhere (the poor are much less likely to vote than the rich), this is also connected to some specificities of the British welfare state that make it easier for Conservative governments to retrench social programs without facing electoral sanctions. Because social programs are strongly targeted at the poor via means-testing and flat rates, the middle class basically doesn’t have an interest in welfare. The drop between middle class wages and benefits is simply too large for this group to consider it a valuable safety net. Figure 2 shows how jobseekers’ benefit is set at much lower lowers than in most other European countries. In countries of continental Europe, where the goal of social benefits is not only to preserve a basic safety net for the poor but to maintain middle class incomes in periods of unemployment or sickness, it is much more difficult to retrench benefits because the middle class also benefits from them. This is why you see people taking to the streets in France about every time the government seeks to downsize entitlement or benefit levels. In Britain, cutting them doesn’t cause much of a fuss because those that suffer don’t vote, and the middle class prefers lower taxes to social insurance.

Finally, it must be noted that the schemes that benefit the middle class as well, such as pensions and the NHS, were not cut. Pension spending was ring-fenced by the government (who was probably aware of the much higher turnout of older voters), while NHS spending is meant to increase in the parliament, probably at the expense of schemes benefitting groups with low turnout.

image (67)

Syriza shows the failure of ‘cartel politics’

As expected, the radical left party Syriza was the big winner of the Greek elections, coming only two seats short of an absolute majority in parliament. But it’s unclear if new Prime Minister Alexis Tsipras will be able to effectively pursue his anti-austerity agenda and renegotiate the terms of the Greek bailout with creditors — and he will surely need to make a number of concessions to its coalition partners, the Independent Greeks, a right-wing anti-immigration party.

What does this victory mean for Greece and for the debt-ridden countries of southern Europe?

Read it over at CNN.com.

Read our article on austerity politics and clientelism in Greece and Portugal in the Journal of European Public Policy.

Dealing with email bankruptcy

On January 1st, New York Times journalist Nick Bilton, acknowledging that he would never be able to answer all of them, deleted a backlog of 46,315 unanswered emails and, officially declared email bankruptcy. A number of high-profile individuals have declared email bankruptcy over the last decade, the first being Lawrence Lessig in 2004. Just like you would declare it impossible to pay back your debts, by declaring email bankruptcy you acknowledge that is reasonably impossible to answer all your backlog of emails, you delete all of them and officially notify your whole address list with an apologetic email along these lines:

Dear person who has sent me an email over the last 4 years,

Having accumulated a completely unmanageable number of unanswered emails, I had to take the difficult decision to delete all of them. I sincerely apologise for letting you down. If you want me to answer your email, please re-send it to me. I promise that I will try to keep up with emails in the future.

Sincerely,

The problem with this procedure is that it constitutes what can be called a disorderly default. Imagine that any individual, firm or government could decide overnight that they didn’t need to pay back their debts: it would be chaos. Nobody would lend money to anyone in fear of not getting their money back. Similarly, a disorderly email bankruptcy can have dramatic consequences. Why would I send emails to people if they can decide at any time that they don’t need to reply? With such a level of uncertainty, in the long run nobody will be sending emails to anyone. If you think about it, there is no reason why we should deal with email bankruptcy differently from a “normal” bankruptcy. We need procedures to make sure that people will reply to their emails, while at the same time helping individuals overwhelmed by a mountain of unanswered emails.

An obvious solution would be an email backlog restructuring procedure. First, individuals should formally file in a formal request for email bankruptcy (below) to be placed under the protection of the state. You don’t want the enforcers of the people you owe replies to come break your fingers. Second, individuals would be placed under the monitoring of a third party and granted more time to reply to their emails. Bailiffs could come to your house and make sure that you devote all your time to replying to the emails. Alternatively, this third party could reply to the unanswered emails, but in exchange of a drastic email adjustment programme to make sure that insolvent emailers will always reply to their emails in future. Of course, the emails answered by the third party should be paid back with an interest. A central goal of these email adjustment programs would be to teach you not to send tons of emails eliciting replies that you won’t be able to answer, and punish you for profligate emailing behavior.  Eventually, in last resort, an email backlog “haircut” can be envisaged in case individuals have to default, but the conditions imposed on the debtor should be even harsher for instance by auctioning their computer material. Even then, this solution would still be less catastrophic than the disorderly email bankruptcies described above.

Form6-27b

What if More Austerity Meant More Immigration?

Since January 1st, citizens from Romania and Bulgaria can freely access the labour markets of all EU member states, including the United Kingdom. Fed by the threat of UKIP and a tabloid press that doesn’t really bother with facts, both Tories and Labour are up in arms in the face of a potential “invasion” of Romanians and Bulgarian who are going to swamp Britain to take advantage of its generous welfare state and its great weather. On January 1st, MPs Keith Vaz (Labour) and Mark Reckless (Conservative) were at Luton airport to “welcome” (pronounce “deter”) Romanians arriving in Britain. Before the new year, the government promptly applied restrictions on access to welfare benefits drawing on the idea that “benefit tourism” is a main driver of migration flows. A report which showed that these fears were unfounded was duly shelved before Christmas because it was “too positive” about the impact of immigration on the British economy.

What is striking about this debate is that the political actors who are the most vocal against immigration are also the most vocal about fiscal retrenchment and reductions in welfare spending. However, nobody ever mentions that cuts in welfare spending may actually foster immigration rather than diminish it.  The common story is that retrenching the welfare state will deter immigration by making the country less attractive for migrants. At best, the welfare system may play no role at all, and at worst, retrenching the welfare state may actually increase immigration because the retreat of the state creates a demand for low-cost private services, for instance in care work, where migrants are over-represented.

First, it must be borne in mind that even if the welfare system was a driver of immigration, the British welfare state is not particularly attractive as compared to most other European countries. The thing is, in the UK it is completely possible for opinion-makers to ignore everything that is taking place “overseas” because nobody really cares. However, most available international data indicates that out-of-work benefits in Britain are actually much lower than most other countries of Western Europe (see also a comparison of net replacement rates for unemployment benefits here). The NHS is a different case because of its relatively universal access (this has been restricted for foreign nationals though) but is a service-based scheme that does not provide the cash transfers that could cause this so-called benefit tourism. If you were a benefit tourist, would you really come to a country with free healthcare but very low unemployment benefits?

Now, available evidence tends to indicate that welfare state generosity has no real impact on immigration flows. The opening of the labour market to Eastern and central European countries in 2004 offered a nice natural experiment: only three countries chose to open their labour markets right away to citizens of new member states: the UK, Ireland and Sweden. The Swedish welfare state is arguably one of the most extensive in the world, and if welfare provision was really the main driver of immigration, Sweden would have faced a much bigger flow of migrants than Britain. However, this did not happen. Between 2004 and 2011, Sweden received an average of 5000 Polish migrants per year, while the UK received 45’000. Immigration did increase after 2004, but nowhere near the proportion its big welfare state would suggest. Independently of welfare protection, demand for labour and wage differentials seem to play a much bigger role.

In theory, there are some valid reasons to believe that an extensive welfare state actually reduces the demand for foreign labour rather than stimulate it. First, to pay for an extensive welfare state such as that of Sweden or Denmark, you need fairly high taxes, which makes labour in general more expensive. Extensive collective bargaining coverage and strong trade unions makes it difficult to bypass this for employers, which means that it is more difficult to employ cheap low-skilled foreign labour in a profitable manner. Since a smaller proportion of the wages paid are actually determined by the individual characteristics of the workers, but rather by a whole set of non-market regulations and agreements which lift up wages, the lower wages that migrants may be ready to accept make a smaller marginal difference: taxes and collectively agreed wages have to be paid anyway. Moreover, since labour is expensive, employers have an incentive to invest in it. The workforce tends to be more qualified and there is a smaller demand for low-skilled cheap labour than in a more deregulated labour market. In short, this type of institutional arrangement tends to create a “race to the top” in skills and social protection, and there are therefore fewer low-skilled, cheap jobs that are typically left to immigrants. In Sweden, however, employers have sought to break this by using posted workers formally employed in other countries. This is pretty much what the much debated Laval case was about. Hence, if you reduce welfare and deregulate labour markets, you actually make it more profitable to employ migrants rather than natives, assuming that migrants are really willing to accept lower wages. More welfare, fewer migrants.

The second mechanism whereby welfare retrenchment may increase immigration is through the replacement of subsidised public social services by cheap private services that only migrants are willing to provide. In many ways, if the state cannot provide subsidized public services at a low cost, individuals will seek to buy them privately at a low cost as well, which often means from migrant workers on low wages. In  countries where the state was unable to cover needs for care for the elderly, such as in Italy, this task is already assumed to a large extent by migrant, mostly female, workers employed on an informal basis. In Britain, funding for social care has been cut by about 20% between 2010 and 2013. Since most of the care is not provided directly by the state but by private or non-profit providers that the state pays, this concretely means greater pressure on these providers on deliver the same level of service but for less money. The only way to do it is to reduce wages. In November, it was revealed that almost half of the firms delivering elderly care have been paying their workers below the minimum wage, and infamous zero-hour contracts are widespread. Unsurprisingly, this sector relies heavily on migrant workers. Research pointed out that half of the workforce in the care  sector in the London area was constituted by migrants. As working conditions in these sectors deteriorate as a result of spending cuts, they are bound to increasingly rely on migrant workers because they are the only ones willing to accept them. This is why the government’s policy stance about welfare and immigration is simply startling: like an arsonist calling the fire brigade, they are blaming a phenomenon that they are causing in the first place.

The Vicious Circle of Inequality, Debt, Crisis, and Austerity

We are in a time of austerity. Public services are being cut, social benefits are being capped, and real wages are shrinking. In the last 5 years, the UK has gone through a big wage squeeze: real wages have declined by 5.5% since 2010, on par with countries such as Greece and Portugal. All these measures have fairly clear regressive distributional effects: low-wage earners (those that are more likely to receive benefits or use public services) are being much more deeply affected than the rich, who can buy these services in the market. We are told that this is just a necessary adjustment of the labour market, and that increasing inequalities and the decline of real wages at the bottom are better than an increase in unemployment.

But what if the increase in inequality and the decline of real wages at the bottom end were not only an effect but actually a cause of the crisis in the first place? What if inequality, debt, crisis and austerity were part of a vicious circle which unfolds over decades and that is simply repeating itself? If one pieces together a number of arguments that are out there, there is a grand narrative that emerges.

1. Labour was disciplined in the 1970s. After three decades of increasing real wages in line with productivity, full employment and increases in national wealth going to labour (the Golden Age, 1945-197), unemployment increased, and Keynesianism was discredited. The “excessive” power of labour unions was commonly blamed as a major cause of the crisis, and appropriate measures to discipline labour were taken. Anti-union legislation was passed in the US (Reagan) and the UK (Thatcher), but non-accommodating monetary policies prioritizing low inflation over full employment were implemented everywhere. That was the 1970s-1980s version of current austerity, only with longer sideburns.

2. Inequalities increased, Real Wages Stagnated. Since the early 1970s, productivity continued to increase, but real wages have stagnated (The Great Moderation). Accordingly, income inequalities have increased almost everywhere, and the share of income going to labour decreased again, while profit margins for capital increased. The income share of those at the top has soared, while those at the bottom remained in the slump.

3. Debt Increased to Compensate for the Stagnation of Real Wages. There are two things that have happened to compensate for the decline of real wages from the 1970s onwards. First, there has been a massive entry of women in the workforce. Of course this has to do with cultural change, but one can also understand this as a response by households to maintain or increase household income in the face of stagnating male wages. Second, and most importantly, there has been a massive increase in private debt. Who is going to buy all the cars, houses, videogames, fridges Ipods and iPhones that are produced in ever greater numbers if real wages stagnate? Supply-side economics tells us that supply generates its own demand, but it doesn’t seem to work by itself. The solution is: you give everybody credit cards. Colin Crouch calls this privatised Keynesianism: instead of supporting consumer demand via public spending, you provide easy credit to everyone, even to poor people. “Subprime”, as in “subprime mortgages”, is another word for “poor”.  In a context of austerity where you cannot expand public spending to boost demand, an alternative is to deregulate the financial sector so that citizen-voters can still buy houses via lower credit requirements, and without direct state involvement. Everybody’s happy until…

4. …The financial system bloats and explodes. Because the whole financial system works through complex chains where risks and insurance are sold, resold, and opaquely packaged in complex products, the connection between loans, interests and actual risks is severed. When people to whom loans shouldn’t have been granted in the first place cannot pay their debts anymore, the whole pyramid collapses.

5. The Government steps in to bail out the banks, because they are “too big to fail”. What was private debt becomes all of a sudden public debt.

6. Governments face a fiscal crisis. The big hole in their national accounts due to the money they had to inject in the financial sector aggravates the problem you have in times of crisis: declining revenues because of lower growth and higher expenditures because of higher unemployment.

7. Back to square one. Governments carry out austerity to reduce debt, and they do so mainly by hitting the poor. Public services are cut, benefits are capped, wages shrink again, and labour is disciplined. Go back 6 paragraphs and start again.

A fairly similar story is provided by Pasquale Tridico here, and you can watch an excellent video by David Harvey here or another one by Mark Blyth here.

How Austerity Killed Greek Parties, While Portuguese Parties Survived

Electionresults2

This shows the electoral score of the two mainstream parties in Greece and Portugal in 2009 (before the outbreak of the crisis) and in 2011 (in Portugal) and 2012 (in Greece), after the outbreak of the crisis. For Greece, this shows the results of the May elections; new elections were held in June as no governmnet could be formed. What is striking is how mainstream Portuguese parties have been resilient compared to Greek parties, and especially PASOK, which completely collapsed. The cumulative vote share of the PS and the PSD remained stable, while it lost 42% in Greece. As we know, support for fringe parties has soared in Greece (Syriza, Golden Dawn) while radical left  parties in Portugal (Bloco de Esquerda and the Communist Party) have remained at astonishingly low levels.

I see two explanations for this. First, as I argued here, Portuguese citizens seem to prefer “exit” (abstention, emigration) over “voice”. Second, the base of support for Greek parties drew heavily on a spoils system (public sector jobs, pensions, cartelistic rights) and they didn’t differ much ideologically. By reducing public spending and removing these cartelistic rights, austerity directly undermines their base of support. Since PASOK and ND could no longer offer rents to voters because the money was gone, voters abandoned them. In Portugal, austerity had started before the crisis, as the 2000s were a lost decade in terms of growth (no real estate bubble). Hence, parties could not rely on the kind of spoils system that PASOK and ND drew on. There is some data on party patronage that shows these differences.